Fed signals year-long rate pause

Jeannie Matthews
March 21, 2019

That could become more apparent Wednesday afternoon, when the Federal Reserve is widely expected to hold interest rates steady.

The Fed's signal that it will keep interest rates on hold for the full year reflects concerns that economic growth is slowing, lower energy prices are weighing on inflation and risks from overseas are dimming the outlook. That's a sharp change from December when the Fed was anticipating as many as three rate hikes in 2019. While the White House expects growth at 3.2 percent in 2019 and at least 3 percent in 2020, the Fed actually cut its prediction of 2019 growth from 2.3 down to only 2.1 percent. It also said it will stop shrinking its bond portfolio in September, a step that should help hold down long-term interest rates.

Having downgraded their USA growth, unemployment and inflation forecasts, policymakers said the Fed's benchmark overnight interest rate, or fed funds rate, was likely to remain at the current level of between 2.25 percent and 2.50 percent at least through this year, a wholesale shift of their outlook.

While the central bank is very close to its twin goals of low and stable inflation and full employment, Chairman Jerome Powell and his colleagues must contend with risks from overseas, including slowing growth in Europe and China and possible spillovers from Britain's exit from the European Union.

The new rate view brings the Fed in line with investors who have argued the central bank would not raise rates this year.

Developments in the trade talks between the US and China helped pull the market lower earlier in the day. "The question for the market remains whether or not the four rate hikes from past year and the unwinding of the balance sheet at the same time could be continuing, even now, to tighten financial conditions".

Powell pushed back on that view, saying the USA economy is in a "good place" and that the outlook is "positive". "It's a great time for us to be patient". The dollar weakened broadly against major trading partners' currencies.

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"The Fed exceeded markets' dovish expectations, which took a toll on the greenback", said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

President Donald Trump, injecting himself not for the first time into the Fed's ostensibly independent deliberations, made clear he wasn't happy, calling the December rate hike wrong-headed.

PRESSURE DROP: Treasury yields sank sharply following the Fed's announcement, and the 10-year yield touched its lowest level in more than a year.

The new economic projections showed weakening on all fronts compared to the Fed's forecasts from December. After 1.8 per cent headline inflation in 2019, they see price gains of 2 per cent on both the main and core indexes for the next two years, eliminating the overshoot they had previously projected. It says that while the labor market remains strong, "growth of economic activity has slowed from its solid rate in the fourth quarter".

Policymakers highlighted February's sluggish pace of hiring - only 20,000 jobs were added - as well as a slowdown in household spending and business investment.

Fed policymakers expect the nation's unemployment rate, now at 3.8 percent, to decline a tick to 3.7 percent by year-end.

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